Reaching for Yield: Structured Products Deluge
"Reaching for yield" is always a bad idea. Last time we talked about this was in the context of the return of the dreaded "CDO" but there's more stuff out there that tries to attract the "reach for yield" crowd.
I'm being deluged with so-called "structured products" as never before. Every day my business e-mail contains anywhere from 3 - 6 new product offerings - all from the same source, a group with whom I've done business on the fixed income side of our portfolios. (I can't imagine how many of these I'd receive if I didn't try to keep on top and unsubscribe to many of the marketing e-mails I receive for my business.)
The theme of all these products is "yield." Since returns on any sort of fixed income are meager to non-existent, it seems people and institutions will respond to anything that promises yield, even if only marginally higher than what the markets offer. I can only assume that the people offering these sorts of products must be getting a good number of responses and purchases, since they keep pumping out the products - with lots of offerings coming in with "limited time" or "window closes at 3 PM" or other such labels to inspire you to buy NOW. Heavy pressure marketing, I'd say.
This all strikes me as a kind of manic activity, and yet one more sign that our markets are so out of whack that any sort of concocted product will attract buyers.
Count me out and here's why:
Back in 2007, a colleague moved to Lehman Brothers from a large bank at which we both worked. As he went to Lehman, I opened my own business. A smart and decent guy, he used to call with offerings of structured products, all of which offered yields above market yields along with absolute "guarantees." I remember being somewhat tempted, since generating yield was difficult (and only more so today) and clients both needed and wanted yield on their investments. But reaching for yield was something I learned to be wary of, and these products appealed to those reaching for yield. I shared my thoughts with my then-at-Lehman-ex-colleague.
His response was that the product had a "floor" guarantee: typically principal and sometimes even a nominal gain were "guaranteed." Okay, but how guaranteed? By Lehman, of course!
Now, you have to understand that I'm the one who pressed him on this. And although polite, I could tell he was wondering what sort of malarial bug had infected my brain that I would question the absolute guarantee of mighty Lehman. Yes, I had told him that I was uncomfortable with the fact that the entire guarantee came down to the Lehman. And since, at the time, Lehman Brothers was one of the premier investment banks in the world, the idea that I would be concerned with the guarantee seemed simply ridiculous to him.
Less than a year later, Lehman was gone, and so was my colleague. Fortunately for him, he found employment elsewhere in short order, since he had a family and his wife stayed home with his kids.
For my part, I was grateful I didn't get sucked into all this, and swore to learn a lesson from it. So far, so good.
I'm being deluged with so-called "structured products" as never before. Every day my business e-mail contains anywhere from 3 - 6 new product offerings - all from the same source, a group with whom I've done business on the fixed income side of our portfolios. (I can't imagine how many of these I'd receive if I didn't try to keep on top and unsubscribe to many of the marketing e-mails I receive for my business.)
The theme of all these products is "yield." Since returns on any sort of fixed income are meager to non-existent, it seems people and institutions will respond to anything that promises yield, even if only marginally higher than what the markets offer. I can only assume that the people offering these sorts of products must be getting a good number of responses and purchases, since they keep pumping out the products - with lots of offerings coming in with "limited time" or "window closes at 3 PM" or other such labels to inspire you to buy NOW. Heavy pressure marketing, I'd say.
This all strikes me as a kind of manic activity, and yet one more sign that our markets are so out of whack that any sort of concocted product will attract buyers.
Count me out and here's why:
Back in 2007, a colleague moved to Lehman Brothers from a large bank at which we both worked. As he went to Lehman, I opened my own business. A smart and decent guy, he used to call with offerings of structured products, all of which offered yields above market yields along with absolute "guarantees." I remember being somewhat tempted, since generating yield was difficult (and only more so today) and clients both needed and wanted yield on their investments. But reaching for yield was something I learned to be wary of, and these products appealed to those reaching for yield. I shared my thoughts with my then-at-Lehman-ex-colleague.
His response was that the product had a "floor" guarantee: typically principal and sometimes even a nominal gain were "guaranteed." Okay, but how guaranteed? By Lehman, of course!
Now, you have to understand that I'm the one who pressed him on this. And although polite, I could tell he was wondering what sort of malarial bug had infected my brain that I would question the absolute guarantee of mighty Lehman. Yes, I had told him that I was uncomfortable with the fact that the entire guarantee came down to the Lehman. And since, at the time, Lehman Brothers was one of the premier investment banks in the world, the idea that I would be concerned with the guarantee seemed simply ridiculous to him.
Less than a year later, Lehman was gone, and so was my colleague. Fortunately for him, he found employment elsewhere in short order, since he had a family and his wife stayed home with his kids.
For my part, I was grateful I didn't get sucked into all this, and swore to learn a lesson from it. So far, so good.
Comments